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Purpose of Debt Issuance
Why does the Federal Government Issue Debt? The United States Treasury primarily issues debt to cover shortfalls in revenue for the federal budget. The Congressional Budget Office’s latest information, for the year 2015 breaks down the federal budget: $3.7 trillion in spending $3.2 trillion in revenue Indicating a $500 billion deficit. Congressional Budget Office. (2016, January). The Federal Budget in 2015. Retrieved March 6, 2016, from https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/graphic/51110-budget1overall.pdf Treasury issues securities to cover this gap in funding. Treasury Auctions The U.S. Treasury issues debt through an auction process. Treasury announces an offering to the public. Potential investors can place bids in one of two fashions: 1.Non-competitive – agree to buy at yield determined by auction 2. Competitive – investors place an order for a number of securities, and maximum yield they are willing to pay.Fabozzi, F. J. (2010). Bond Markets, Analysis, and Strategies. Boston: Prentice Hall. Full Faith and Credit Securities offered by the Treasury are backed by the “full faith and credit” of the U.S. government. Essentially, the United States government guarantees that obligations will be repaid, and on time.Investopedia. (2008). Full Faith And Credit. Retrieved March 06, 2016, from http://www.investopedia.com/terms/f/full-faith-credit.asp?layout=orig There has only been one moment – in 1979 – when payments were delayed due to an unusually large volume of small investors, delayed debt ceiling legislation, and a software problem involving word processing.Marron, D. (2011). The Day the United States Defaulted on Treasury Bills. Retrieved March 06, 2016, from http://dmarron.com/2011/05/26/the-day-the-united-states-defaulted-on-treasury-bills/ Types of Securities Offered at Auction Bills – short-term, maturity from a few days to 52 weeks; sold at discount Notes – 2, 3, 5, 7, 10 year maturities; pay interest every 6 months Bonds – 30 year maturity rate; pay interest every 6 months EE and E Savings Bonds – up to 30 years; pay interest based on market rates 'Treasury Inflation Protected Securities (TIPS) – '''5, 10, 30 year maturities; inflation protected, based on the Consumer Price Index (price of marketable goods), payoff is the larger of the original or adjusted principal. '''Floating Rate Notes – '''2 year maturities; variable interest rates determined by discount rate of 13 week Treasury bills.U.S. Department of the Treasury. (2015, June 10). ''Treasury Securities & Programs. Retrieved March 05, 2016, from https://www.treasurydirect.gov/indiv/products/products.htm Treasury Securities on the Secondary Market Treasury securities are popular investment options because the United States dollar is seen as a strong and safe currency. Investors are willing to risk lower interest rates in order to secure guaranteed obligations of payment. Treasuries are also a very liquid form of securities, making them excellent candidates for trade on the open market. Treasury securities will vary in value based on current interest rates. Generally, if current interest rates are higher than a security issue’s the price of that issue will decline on the secondary market. The secondary market operates as an over-the-counter market, where dealers offer bid and ask prices on securities that are outstanding.Fabozzi, F. J. (2010). Bond Markets, Analysis, and Strategies. Boston: Prentice Hall. ,Wilson, C. G., & Brown, E. O. (2010). The U.S. National Debt: Background, Issues, Significance. Hauppauge, NY: Nova Science. Back to National Debt